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Chapter 04 Market Failures: Public Goods and Externalities Answer Key
Multiple Choice Questions
1. Market failure is said to occur whenever
C.
some consumers who want a good do not obtain it because the price is higher than they are
willing to pay.
D.
government intervenes in the functioning of private markets.
2.
Market failures
A.
are only a concern when they result in prices that are too high.
B.
apply exclusively to situations where private markets do not produce any of an economically
desirable good.
3.
Which of the following is an example of market failure?
A.
negative externalities
B.
positive externalities
4-2
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
AACSB: Knowledge Application
A c c e s s i b i l i t y :
Keyboard Navigation
Blooms: Apply
D i f f i c u l t y :
03 Hard
Learning Objective: 04-01 Differentiate between demand-side market failures and supply-side
market failures.
Test Bank: I
Topic :
Market Failures in Competitive Markets
4.
Demand-side market failures occur when
C.
government imposes a tax on a good or service.
D.
a good or service is not produced because no one wants it.
5.
People enjoy outdoor holiday lighting displays and would be willing to pay to see these
displays but can't be made to pay. Because those who put up lights are unable to charge others to
view them, they don't put up as many lights as people would like. This is an
example of a
A.
negative externality.
B.
supply-side market failure.
6.
Which of the following is the best example of a supply-side market failure?
A.
No one provides street lights in a town because, once the lights are in operation, people
don’t have to pay to use them.
7.
Supply-side market failures occur when
A.
supply curves don't reflect consumers' full willingness to pay for a good or service.
8.
From society's perspective, in the presence of a supply-side market failure, the last unit of a
good produced typically
A.
generates more of a benefit than it costs to produce.
B.
produces a benefit exactly equal to the cost of producing the last unit.
4-4
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
Blooms: Apply
D i f f i c u l t y :
03 Hard
Learning Objective: 04-01 Differentiate between demand-side market failures and supply-side
market failures.
Test Bank: I
Topic :
Market Failures in Competitive Markets
9.
The trains of the Transcontinental Railway Company, when shipping goods, sometimes emit
sparks that start fires along the tracks and damage the property of others. If Transcontinental
does not pay for the damage it causes, what has occurred?
A.
positive externality
B.
demand-side market failure
10.
What two conditions must hold for a competitive market to produce efficient outcomes?
A.
Demand curves must reflect all costs of production, and supply curves must reflect
consumers' full willingness to pay.
11.
If the demand curve reflects consumers' full willingness to pay, and the supply curve reflects
all costs of production, then which of the following is true?
C.
There will be no consumer or producer surplus.
D.
Consumer surplus will be maximized, and producer surplus will be minimized.
12.
Consumer surplus
C.
is the difference between the minimum prices producers are willing to accept for a product
and the higher equilibrium price.
D.
rises as equilibrium price rises.
13.
Producer surplus is the difference between
A.
the maximum prices consumers are willing to pay for a product and the lower equilibrium
price.
4-6
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
C. the minimum prices producers are willing to accept for a product and the higher equilibrium
price.
D. the maximum prices consumers are willing to pay for a product and the minimum prices
producers are willing to accept.
AACSB: Knowledge Application
A c c e s s i b i l i t y :
Keyboard Navigation
Blooms: Understand
D i f f i c u l t y :
02 Medium
Learning Objective: 04-02 Explain the origin of both consumer surplus and producer surplus,
and explain how properly functioning markets maximize their sum, total surplus, while
optimally allocating resources.
Test Bank: I
Topic :
Efficiently Functioning Markets
14.
Jennifer buys a piece of costume jewelry for $33, for which she was willing to pay $42. The
minimum acceptable price to the seller, Nathan, was $30. Jennifer experiences
A.
a consumer surplus of $12, and Nathan experiences a producer surplus of $3.
15.
Amanda buys a ruby for $330 for which she was willing to pay $340. The minimum
acceptable price to the seller, Tony, was $140. Amanda experiences
D.
a producer surplus of $10, and Tony experiences a consumer surplus of $190.
4-7
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
D i f f i c u l t y :
02 Medium
Learning Objective: 04-02 Explain the origin of both consumer surplus and producer surplus,
and explain how properly functioning markets maximize their sum, total surplus, while
optimally allocating resources.
Test Bank: I
Topic:
Efficiently Functioning Markets
16.
Other things equal, a fall in the market price caused by a change in supply will
D.
decrease producer surplus while leaving consumer surplus unchanged.
17.
Graphically, if the supply and demand curves are linear, consumer surplus is measured as the
triangle
A.
under the demand curve and below the actual price.
18.
Graphically, producer surplus is measured as the area
A.
under the demand curve and below the actual price.
B.
under the demand curve and above the actual price.
19.
A producer's minimum acceptable price for a particular unit of a good
A.
is the same for all units of the good.
B.
will, for most units produced, equal the maximum that consumers are willing to pay for the
good.
20.
Refer to the diagram. Assuming equilibrium price P1, consumer surplus is represented by areas
D.
a + c.
21.
Refer to the diagram. Assuming equilibrium price P1, producer surplus is represented by areas
A.
a + b.
B.
a + b + c + d.
22.
Refer to the diagram. The area that identifies the maximum sum of consumer surplus and
producer surplus is
A.
a + b + c + d + e + f.
B.
c + d + f.
4-11
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
optimally allocating resources.
Test Bank: I
Topic:
Efficiently Functioning Markets
23.
Refer to the diagram. If actual production and consumption occur at Q1,
A.
efficiency is achieved.
B.
consumer surplus is maximized.
24.
Refer to the diagram. If actual production and consumption occur at Q2,
C.
an efficiency loss (or deadweight loss) of a + c occurs.
D.
an efficiency loss (or deadweight loss) of e + f occurs.
25.
Refer to the diagram. If actual production and consumption occur at Q3,
A. efficiency is achieved.
4-13
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
D i f f i c u l t y :
02 Medium
Learning Objective: 04-02 Explain the origin of both consumer surplus and producer surplus,
and explain how properly functioning markets maximize their sum, total surplus, while
optimally allocating resources.
Test Bank: I
Topic :
Efficiently Functioning Markets
26.
Refer to the diagram. Which of the following areas best represents the efficiency loss from
underproduction?
A.
a + c
B.
e + f
27.
Allocative efficiency occurs only at that output where
A.
marginal benefit exceeds marginal cost by the greatest amount.
4-14
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
AACSB: Knowledge Application
A c c e s s i b i l i t y :
Keyboard Navigation
Blooms: Understand
D i f f i c u l t y :
02 Medium
Learning Objective: 04-02 Explain the origin of both consumer surplus and producer surplus,
and explain how properly functioning markets maximize their sum, total surplus, while
optimally allocating resources.
Test Bank: I
Topic:
Efficiently Functioning Markets
28.
At the output level defining allocative efficiency,
A.
the areas of consumer and producer surplus necessarily are equal.
B.
marginal benefit exceeds marginal cost by the greatest amount.
29.
Which of the following conditions does not need to occur for a market to achieve allocative
efficiency?
A.
Consumers' maximum willingness to pay equals producers' minimum acceptable price for the
last unit of output.
4-15
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
Test Bank: I
Topic :
Efficiently Functioning Markets
30.
At the output where the combined amounts of consumer and producer surplus are largest,
A.
the areas of consumer and producer surplus necessarily are equal.
31.
An efficiency loss (or deadweight loss)
C.
can result from underproduction, but not from overproduction.
D.
can result from overproduction, but not from underproduction.
32.
An efficiency loss (or deadweight loss) declines in size when a unit of output is produced for
which
C.
consumer surplus exceeds producer surplus.
D.
producer surplus exceeds consumer surplus.
33.
The two main characteristics of a public good are
A.
production at constant marginal cost and rising demand.
34.
Nonrivalry and nonexcludability are the main characteristics of
A.
consumption goods.
B.
capital goods.
35.
Unlike a private good, a public good
A.
has no opportunity costs.
36.
Which of the following is an example of a public good?
D.
a bottle of soda
37.
A public good
A.
can be profitably produced by private firms.
B.
is characterized by rivalry and excludability.
4-18
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
Learning Objective: 04-03 Describe free riding and public goods, and illustrate why private
firms cannot normally produce public goods.
Test Bank: I
Topic:
Public Goods
38.
The market system does not produce public goods because
D.
their production seriously distorts the distribution of income.
39.
Public goods are those for which there
A.
is no free-rider problem.
B.
are no externalities.
40.
If one person's consumption of a good does not preclude another's consumption, the good is
said to be
D.
excludable.
4-19
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
AACSB: Knowledge Application
A c c e s s i b i l i t y :
Keyboard Navigation
Blooms: Understand
D i f f i c u l t y :
02 Medium
Learning Objective: 04-03 Describe free riding and public goods, and illustrate why private
firms cannot normally produce public goods.
Test Bank: I
Topic :
Public Goods
41.
Non excludability describes a condition where
A.
one person's consumption of a good does not prevent consumption of the good by others.
42.
Which of the following statements is not true?
A.
Some public goods are paid for by private philanthropy.
B.
Private provision of public goods is usually unprofitable.
43.
Toll-free roads sometimes get congested, such as during rush-hour traffic. During those
times, we would say that these roads are
A.
excludable and rival.
B.
excludable and nonrival.
44.
Because of the free-rider problem,
A.
the market demand for a public good is overstated.
45.
At the optimal quantity of a public good,
A.
marginal benefit exceeds marginal cost by the greatest amount.
B.
total benefit equals total cost.
